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With Defense Dept. budget cuts looming, investors have abandoned defense and aerospace stocks. As a result, the shares are trading at bombed-out valuations, and expectations for the group are low.

Some defense-related stocks don't deserve to be dumped, however. Take
Curtiss-WrightCW -0.8701347305389222%Curtiss-Wright Corp.U.S.: NYSEUSD105.95
-0.93-0.8701347305389222%
/Date(1481320921436-0600)/
Volume (Delayed 15m)
:
298971AFTER HOURSUSD105.95
%
Volume (Delayed 15m)
:
3160
P/E Ratio
25.43451123487613Market Cap
4727088587.02026
Dividend Yield
0.49079754601226994% Rev. per Employee
253824More quote details and news »CWinYour ValueYour ChangeShort position
(ticker: CW), a maker of pumps, valves and computing systems for planes, boats and submarines, which draws 40% of its revenue from the defense sector. The company's shares have fallen 28%, to $29.27, from a February high, as sales related to Abrams tanks and Stryker armored vehicles have declined as the programs waned. Yet, Curtiss also supplies healthier defense programs, and has a growing roster of commercial customers in the aerospace, nuclear, and oil and gas industries.

Management has been taking actions to restructure the business in the face of tighter defense spending, including closing facilities and reducing headcount. Such moves could drive operating profit margins to 10.7% next year from 9.6% in 2012.

Curtiss-Wright's electronics power the Air Force's Global Hawk drone. The company also makes flight-control systems for Boeing's Dreamliner.
SeonJoon Cho/Bloomberg News

Curtiss-Wright trades for a depressed 10 times 2013 expected earnings. The shares could rise 25% or more in the next 12 months as investors gain clarity on defense-spending cuts, and as restructuring actions take hold. The company pays an annual dividend of 36 cents a share and yields 1.2%.

BASED IN PARSIPPANY, N.J., Curtiss-Wright traces its roots to the Wright Brothers and Glenn Curtiss, the father of naval aviation, who founded the company in the 1920s as a manufacturer of aircraft engines. It evolved into a diversified manufacturer, supplying products and services for numerous applications. Among other things, Curtiss-Wright makes nuclear-reactor cooling pumps, flight-control systems for
BoeingBA 0.7078962610206577%Boeing Co.U.S.: NYSEUSD156.49
1.10.7078962610206577%
/Date(1481320966834-0600)/
Volume (Delayed 15m)
:
2604928AFTER HOURSUSD156.49
%
Volume (Delayed 15m)
:
102944
P/E Ratio
23.827577806200132Market Cap
95901426791.2805
Dividend Yield
2.7861205188829956% Rev. per Employee
587720More quote details and news »BAinYour ValueYour ChangeShort position
(BA) and Airbus aircraft, pumps used in oil production, and the computing system that powers the U.S. Air Force's unmanned Global Hawk.

Analysts expect Curtiss-Wright to earn $124 million this year, or $2.60 a share, on revenue of $2.1 billion. Next year, earnings could rise 18% to $3.08, on 6.5% sales growth. In the June quarter, defense sales fell 3%, and ground-defense programs could remain pressured as the Army scales back. But demand from the Navy and aerospace customers looks strong. The company received new orders from the Navy in the quarter, related to an aircraft carrier and a submarine program.

IN ANNOUNCING RESULTS Aug. 3, management said it was "cautiously optimistic" on the defense portfolio, noting its products for surveillance and electronic warfare are likely to get increased government funding. The company offered sales-growth guidance of 2% to 4% for the year.

In a related conference call, CEO Martin Benante said that even if significant spending cuts take place, "our long-term view in defense remains favorable, based on our role in naval defense and the government's increased focus on new ISR [intelligence, surveillance and reconnaissance) requirements in electronic warfare and communications capabilities."

Aerospace is a strong spot for Curtiss-Wright, driven by rising demand for flight-control systems and metal treatments on Boeing aircraft, including the 787 Dreamliner. Boeing is expected to produce 10 Dreamliners a month in 2013, up from 3.5 this year. James Foung, an analyst at Gabelli, notes that Curtiss-Wright makes $425,000 on each Dreamliner.

Curtiss-Wright

Recent Price

$29.27

52 Week Hi-Lo

$41.91-25.67

Market Val (bil)

$1.41

Revenue 2012E (bil)

$2.1

Net Income 2012E (mil)

$124

EPS 2012E

$2.60

EPS 2013E

$3.08

P/E 2013E

10

Dividend Yield

1.2%

E=Estimate. Sources: Bloomberg; Thomson Reuters

The nuclear business is growing, as well, as shipments of coolant pumps ramp up to new Westinghouse AP1000 nuclear-reactor projects in China and the US. Currently there are plans to build five such reactors, and Curtiss-Wright is the sole provider of pumps to this design. More orders are likely to come in the next few quarters from China, once that country decides on the timing of building new plants.

CURTISS-WRIGHT HAS A solid balance sheet, with $588 million in debt and $213 million in cash. Net debt is 20% of total capitalization. The company has an unfunded pension obligation of $214 million, to which it plans to contribute $44 million this year.

Curtiss-Wright could generate $62 million in free cash this year, and $109 million in 2013. Management has a good track record of using the cash for acquisitions, with return on equity of 10.8%. Cash has also been used for stock buybacks and dividends.

Not much needs to go right at Curtiss-Wright for the shares to rise. As investors realize that the company's commercial businesses could take care of any fallout from defense, the stock could find its way back to an average historical price/earnings multiple of 13. At that valuation, the shares would be worth $40.